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Policy Watch: Designing an Effective Investment Tax Credit

Author

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  • Laurence H. Meyer
  • Joel L. Prakken
  • Chris P. Varvares

Abstract

The investment tax credit (ITC) allows firms to reduce their tax liability by an amount related to their expenditures on equipment, and thus reduces the cost of acquiring capital. An investment tax credit can be introduced temporarily to stimulate investment as part of a countercyclical fiscal policy or permanently as part of a strategy to enhance capital formation, raise labor productivity, and so speed longer-term economic growth. The discussion in this paper will focus mainly on the permanent ITC, although it will include some comments on the temporary version. As this paper is being written, President-elect Bill Clinton is widely expected to propose an ITC (of some sort) to Congress soon after taking office. Since the federal deficit continues to constrain fiscal policy, attention has been focused on designing an ITC that delivers the greatest stimulus per dollar loss of revenue.

Suggested Citation

  • Laurence H. Meyer & Joel L. Prakken & Chris P. Varvares, 1993. "Policy Watch: Designing an Effective Investment Tax Credit," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 189-196, Spring.
    • Handle: RePEc:aea:jecper:v:7:y:1993:i:2:p:189-96
    Note: DOI: 10.1257/jep.7.2.189
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.7.2.189
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    References listed on IDEAS

    as
    1. J. Bradford De Long & Lawrence H. Summers, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 445-502.
    2. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
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    Cited by:

    1. Thomas Karier, 1994. "Business Tax Incentives and Investments," Economics Working Paper Archive wp_103, Levy Economics Institute.
    2. Thomas Karier, "undated". "Investment Tax Credit Reconsidered, Business Tax Incentives and Investments ," Economics Public Policy Brief Archive 13, Levy Economics Institute.
    3. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1995. "Three Financing Constraint Hypotheses and Inventory Investment: New Tests With Time and Sectoral Heterogeneity," Macroeconomics 9510001, University Library of Munich, Germany, revised 09 Oct 1995.
    4. Steven M. Fazzari & Benjamin Herzon, 1995. "Capital Gains Tax Cuts, Investment, and Growth," Economics Working Paper Archive wp_147, Levy Economics Institute.
    5. Thomas Karier, 1999. "Business Tax Incentives and Investment," Macroeconomics 9907001, University Library of Munich, Germany.
    6. Jie Mao & Chunhua Wang, 2016. "Tax incentives and environmental protection: evidence from China’s taxpayer-level data," China Finance and Economic Review, Springer, vol. 4(1), pages 1-30, December.
    7. Tarkom, Augustine, 2022. "Impact of COVID-19 exposure on working capital management: The moderating effect of investment opportunities and government incentives," Finance Research Letters, Elsevier, vol. 47(PB).
    8. Alejandro Diaz-Bautista & Julio R. Escandon, 2003. "A Simple Dynamic Model of Credit and Aggregate Demand," Macroeconomics 0308001, University Library of Munich, Germany.
    9. Kinga B. Tchorzewska, 2024. "A Lost Opportunity? Environmental Investment Tax Incentive and Energy Efficient Technologies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(12), pages 3301-3333, December.

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    More about this item

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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